China, Vietnam and other countries have one-party political systems ruled by their communist parties, but in the last couple of decades they have also embraced market economies. Their economic systems look more like a kind of state capitalism, with the government behaving like one giant corporation, than anything resembling Soviet style communism. For all practical purposes, only Cuba and North Korea have remained faithful to the highly centralized style of communism once practiced in the Soviet Union. The sorry state of their economies speaks for itself.

Given that most countries around the world now have economies based on some form or another of capitalism and open markets, you would expect that the passionate ideological debates of the past are over. Not so. The economic debates in the US and many other countries are actually fiercer than ever, but they are taking place within the broad framework of capitalism. Capitalism continues to evolve, and different people have their own ideas about how that should happen.

There are many lenses through which to view the evolution of capitalism. Let me offer my reflections on the topic through a few such lenses.

The most general set of discussions starts with a version of this question: what is the role of government and government regulations in a capitalist, market economy? The answers range from the minimal role for government advocated by libertarians, to the very strong role advocated by the more socialist inclined.

Debates around these issues are typically based on ideology along the classic liberal-conservative political spectrum. I think that such ideologically based discussions can only offer us false choices. In our complex, global and unpredictable world, discussions of these highly complex questions grounded in ideology keep us from effectively addressing the issues. The terms liberal and conservative may still be alive and well when it comes to social issues, but they are increasingly irrelevant when applied to economic policy.

If not based in ideology, how do you decide on the proper balance between the role of government and that of the private sector and open markets? I think that such a balance should be based on a system of checks and balances akin to the brilliant system of governance set up by The Founding Fathers to prevent any one branch of government from becoming too powerful at the expense of the others, and to induce them to cooperate in getting things done.

The notion of checks and balances is an integral part of US culture. Not only has it endured for over two centuries, but it has done so while adapting to the vast changes that the country has undergone during that time, including its massive growth in size, population and power; the vast diversity in the composition of its people; and the highly different political beliefs, social mores and market conditions it has experienced through all that time. Its success is largely due to its built-in flexibility to adapt to vastly varying conditions. If any part of the system becomes too prominent, the other parts react to limit its powers and bring the overall system back in balance.

A system of checks and balances is particularly applicable in today’s highly complex and fast changing economic environment. And in fact, if you examine the past eighty years or so, we have started to apply such a system to shape the relationship between government and the private sector.

Prior to the Great Depression of the 1930s, government had a limited role in the US and other countries with capitalist economies. After taking office in 1933, President Franklin Roosevelt instituted a series of government programs which became known as the New Deal. The New Deal significantly expanded the role of government in response to the economic devastation and high unemployment of the Great Depression. It also instituted a set of regulations to curb the financial excesses and speculation which led to the 1929 Wall street crash.

Over the next several decades, the role of government in the US economy continued to grow. By the 1970s, many were questioning whether government had grown too big and was now overly regulating and stifling the economy. The pendulum started to swing in the opposite direction, especially after the election of Ronald Reagan in 1980. The new mood was succinctly captured in Reagan’s famous phrase uttered in his 1981 inaugural address: “Government is not the solution to our problem; government is the problem.”

Many politicians, academics and economists embraced this anti-government ideology. They believed that free markets could now operate smoothly and self-correct with minimal government oversight. Over the next thirty years, they dismantled or significantly relaxed many of the financial regulations put in place during and after the New Deal, because they believed that market flexibility and open competition on their own where our most reliable and effective safeguards against economic failure.

Then came the 2008 financial crisis, the worst since the Great Depression. Many believe that the crisis was the direct result of the prevailing anti-regulation ideology of the past few decades, which once more led to a reckless, largely unregulated behavior by financial institutions.

Our system of checks and balances has started to react to the crisis. The pendulum is now swinging in the other direction, with the Financial Reform law signed by President Obama in July of 2010. It is too early to tell whether this law will make the US financial system transparent and accountable enough to avoid another major economic crisis, as well as ensure that individuals are protected against the excesses of large financial institutions. There continues to be strong opposition to the bill, by many who are still holding on to their anti-government ideological position despite our recent experiences. These include not only politicians but also academics and economists who by now should know better.

Let me turn to another important question about the evolution of capitalism: How much of a safety net should government provide to its citizens in need, such as the poor, unemployed, sick, disabled and elderly? There is a wide spectrum of positions. At one end are the partisans of a laissez-fair, let-them-it-cake style of capitalism, who believe that government should provide minimal services. At the other end, are those who prefer a stronger government and a more nanny state style of capitalism.

This is an area under extensive debate in the US, given the valid concerns about the growing deficit, and the need to make government more productive, reduce expenses and cut back on services and benefits. Some feel that the way to do this is to return to what they consider a pure form of capitalism, where everyone is on their own and government does little for them, let alone provide any kind of safety net for those in need.

I strongly disagree, and would argue that this is contrary to the essence of capitalism. To help me make my points, let me invoke no less an authority than Adam Smith. Adam Smith is the 18th century Scottish philosopher and economist, who is generally considered the father of free-market, free-trade capitalism. Smith is most famous for The Wealth of Nations, published in 1776 and generally regarded as the first work of modern economics. He is also well known for his famous metaphor of the invisible hand - “the free market, while appearing chaotic and unrestrained, is actually guided to produce the right results by this so-called invisible hand.”

Driven by a narrow political ideology, some seem to think that Smith was an advocate of a kind of survival of the fittest style of capitalism, which I believe totally misrepresents his views. In his other major big work, The Theory of Moral Sentiments, Smith argued that sympathy, the human ability to have strong feelings of concern for another person, is required to achieve beneficial results in society.

He believed in a balanced approach to capitalism. On one side is the fierce competition and self-interest inherent in open, free markets. On the other is the supportive community behavior and sympathy found in well functioning, stable societies.

“Do we really need a new capitalism, carrying, in some significant way, the capitalist banner, rather than a non-monolithic economic system that draws on a variety of institutions chosen pragmatically and values that we can defend with reason?”, he asks, and then adds:

“This is not only the question we face today, but I would argue it is also the question that the founder of modern economics, Adam Smith, in effect asked in the 18th century, even as he presented his pioneering analysis of the working of the market economy.”

“What exactly is capitalism?,” he continues. “The standard definition seems to take reliance on markets for economic transactions as a necessary qualification for an economy to be seen as capitalist. In a similar way, dependence on the profit motive, and on individual entitlements based on private ownership, are seen as archetypal features of capitalism. However, if these are necessary requirements, are the economic systems we currently have, for example, in Europe and America, genuinely capitalist? All the affluent countries in the world – those in Europe, as well as the US, Canada, Japan, Singapore, South Korea, Taiwan, Australia and others – have depended for some time on transactions that occur largely outside the markets, such as unemployment benefits, public pensions and other features of social security, and the public provision of school education and healthcare.”

Professor Sen observes that in affluent countries, where it has been most successful, capitalism is pragmatic, not ideologically pure, and that this pragmatism goes back to the days of Adam Smith.

“It is often overlooked that Smith did not take the pure market mechanism to be a free-standing performer of excellence, nor did he take the profit motive to be all that is needed . . . People seek trade because of self-interest – nothing more is needed, as Smith discussed in a statement that has been quoted again and again explaining why bakers, brewers, butchers and consumers seek trade. However an economy needs other values and commitments such as mutual trust and confidence to work efficiently.”

A capitalist, affluent society with few safety nets will not be able to function effectively for long, especially in a democracy like the US where people will not tolerate an authoritarian regime imposing order from above.

We need to make government more efficient. We need to reduce expenses and benefits that are no longer sustainable, especially in the more advanced economies with aging populations like the US and Western Europe. We need to cut back on government entitlements that are no longer affordable, such as the ability to retire in your 50s with a large pension for life. But, having a large fraction of citizens with no health care and other safety-net benefits is an unwise position for any country to adopt, especially affluent, democratic, open societies like the US.

I want to conclude by briefly discussing the position of groups like the Tea Party and especially, that of the politicians, talk radio hosts and cable news personalities associated with the movement. I think of them as advocating a kind of tribal form of capitalism. They strongly argue that they want to significantly cut back the role of government at all levels, reduce taxes, and provide significantly fewer services to everyone. But, short of a very small number of committed libertarians, few truly embrace this position.

When you probe a little deeper, what they really mean is that you should cut services for everyone else, - especiallythe others from whom they want to Take America Back. But, not for them and their friends, families and communities. After all, it is their country. This was best exemplified during the heated debates prior to the passing of last year’s Health Care Reform bill, where many of the most vociferous critics of health care reform where also shouting things like keep your government hands off my Medicare. The reality is that most people, even Tea Partiers and other political conservatives, want the government to continue to provide them services, albeit more efficiently, with fewer regulations and lower taxes.

The ongoing debates about the evolution of capitalism are very important. Let us hope that the ideologically inspired, angry, irrational rhetoric of the past few years will give way to the kind of rational, civil discourse that we need to set the country in the right direction for the future

Comments

I am always amazed by the selfishness of some who rail against government helping people in need, people who may have different circumstances from their own while at the same time they strenuously fight to protect governments' help for themselves. Your Medicare example is an excellent case in point.

I am one of the diminishing group of Americans who is fortunate to have a defined benefits pension from our former employer and who also enjoys the social security check written on government paper (actually electronically deposited) each month. Do I feel that I earned each? Yes, I do.

I suspect that most 'tea-partiers' feel that they too, have earned their Medicare and Social Security benefits ...assuming of course that the crusading tea-partier is of the age eligible to collect such benefits.

The difference that I feel, not being a tea-partier, versus what seems to be the underlying beliefs of those who are partiers is embedded in my philosophy of supporting those less fortunate than ourselves. I don't offer my support in a sense of do-goodism. I support the more liberal stance as a national security issue.

We are fast approaching a time in this country, with wealth concentrating in the very few, wherein the masses may uprise against the few.

Just look around you. Unemployment is about 9% if you use Bureau of Labor Statistics numbers, but actually much higher if you include all who are truly unemployed or so under-employed as to be unable to support themselves and their families in today's economy. Are some people responsible for their own unemployment? Of course they are. But should we view even the most irresponsible as human waste to be disposed-of and not to be helped? I don't think so.

Aside from the unfortunate, the truly helpless, young people in the hundreds of thousands are coming out of college today and by necessity moving back home with their parents. They are doing so, not because that is their preferred path, but because there are no jobs. How long will this educated class stand by and wait for the economy to improve, for jobs to become available? The doom and gloom factor has a high multiplier when you are bright enough and well educated enough to understand that things can be better. How long will they wait, languishing away at their parents home, unemployed or under-employed?

Upheaval in the near future is inevitable. Will it be in peoples' attitudes in the way we choose to govern ourselves? Will it be in an uprising of the have-not's demanding and if necessary forcibly taking from the haves? I don't know, but I think we are ripe for a great confrontation. My hope is that it plays out at the ballot box and sane people prevail.

My fear is that insanity and self-interest will trump an orderly transition to a more egalitarian society, one based on our capitalistic history, but one that understands that any system in its purest form, whether the extremes of the libertarian or the extremes of the socialistic is patently unfair and unworkable. In the end for us to survive as a nation, we must all become 'absolute' pragmatists. I hope that we are capable of making the transition from the extremes of our current ideologue tendencies.

One striking observation I made while working in America during Hilary Clinton's first attempt at reforming US Health Care is Americans' somewhat irrational fear of any major social reforms contemplated by the US government. The cost of social security, abuses of it seem to be big concern, further amplified by perceived prospect of US Government becoming "socialist". From my experience (I have grown up in Communist Poland, and live now in Australia) the social security is wasteful and open to frauds as anything else administered by government bureaucracy. One should not however look at the cost of the social security alone. It is necessary understand that social security is there to remove desperation from people's lives. I mean the kind of desperation which historically has proven to lead to major social upheavals and crime. That is why I am happily paying my high taxes in Australia and enjoying social stability and low level of crime, and above all universal health insurance. While US experience was exciting and stimulating for me I think all Americans could do with a little less crime and riots and the ones among them without health insurance should not be made to wait for the next Democratic Government. Viewed as a necessary cost of social stability and low crime the social security actually makes good business sense.

It's amazing how little we understand about capitalism. Especially the boom and bust cycles that are intrinsic to capitalism. In the chip industry, the boom and bust cycles happen like clockwork, every four years. And every four years the chip industry says "it will be different this time..."

Karl Marx documented these boom and bust cycles in the mid-19th century yet we still think we can do away with them. If we do, then it's not capitalism, it'll be something else...

What if capitalism retained its boom and bust cycles but their effect did not cause starvation, poverty, war, etc...? Can we keep the good w/o the bad? Or do we toss the baby with the bathwater each time...?